The IRS Commissioner has described the Employee Retention Credit ("ERC") as one of the most complex tax provisions ever administered by the IRS. Further, IRS administration of the ERC has endured a tumultuous history that has included rampant, overly aggressive, and sometimes predatory solicitation by third party promoters with instances of tax fraud and other abuses. As a direct response, the IRS initiated several criminal investigations with numerous already resulting in federal prosecutions and many more currently underway. Those widespread abuses also prompted an IRS moratorium that halted the processing of newly filed ERC claims back in the fall of 2023, with multiple taxpayers since filing lawsuits against the IRS asking the courts to enforce payment of their ERC claims. The underlying complexity of the ERC along with increased IRS scrutiny across all ERC claims, as thousands are currently under IRS audit, has significantly impeded timely IRS processing and payment of ERC claims over the past 12-month period.
However, on August 8, 2024, the IRS made the long-awaited announcement that it will resume its processing of outstanding ERC claims after the IRS had placed a pause on its processing of newly filed claims submitted after September 14, 2023. The IRS announcement represents welcome news to qualifying small businesses across the U.S. who were eligible to file ERC claims and have been anxiously awaiting the IRS to process their properly prepared ERC claims and issue refund checks accordingly.
Nevertheless, there remains a considerable backlog of ERC claims yet to be processed by the IRS, with additional information and insights trickling out since the IRS announced that it will resume its processing. In a news release issued in connection with the announcement, the IRS has communicated that those businesses that filed their ERC claims between September 14, 2023, and January 31, 2024, will begin seeing the IRS issue payments or denials for those claims. Further, the IRS offered insight into its methodology by starting with the highest-risk and lowest-risk claims, with current plans to issue payments for 50,000 ERC claims that were identified as low-risk starting in September by moving those into the IRS pipeline for payment processing, along with another large block of low-risk payments that the IRS anticipates issuing later this fall.
Eligible Taxpayers Who Properly Filed ERC Claims Still Awaiting IRS Processing:
The IRS cautioned taxpayers who have already filed ERC claims that the process will take time, as the agency warned that its processing speeds will be slower than in the past due to the IRS being more deliberate and methodical in its review of ERC claims to combat widespread fraud and other abuses. Additionally, the IRS advised that for taxpayers who have already filed ERC claims, no action is necessary at this time, and those taxpayers should simply await further notification from the IRS.
Options for Taxpayers Who Have Received a Denial Letter from the IRS:
Since July 20, 2024, after a detailed review and to protect businesses, the IRS issued 28,000 disallowance letters to businesses that the IRS identified as having filed ERC claims that had a high-risk of being improper. However, some businesses have received denial letters from the IRS in error, and the IRS has noted that in those cases where ERC claims can be substantiated and proven to have been improperly denied, the agency will work with taxpayers to get it right. Additionally, for taxpayers who receive a letter from the IRS denying their ERC claim, they can choose to file an administrative appeal with the IRS independent Office of Appeals or file refund litigation in the appropriate district court. Thus, it is critical for taxpayers to remain vigilant against improperly issued denial letters.
Taxpayers Who Previously Filed ERC Claims with Uncertain Validity and Remedial Steps:
As the IRS continues to work through denials of improperly filed ERC claims, the agency is also intensifying its audits and pursuing civil and criminal investigations of potential fraud and other abuses. In addition to pausing ERC processing, the IRS has also offered relief options to some businesses and nonprofits that may have wrongly claimed the credit.
The original IRS voluntary disclosure program, where businesses were able to come forward and pay back 80% of the ERC refund that it received in exchange for information, yielded more than $1.09 billion from over 2,600 taxpayers who volunteered to participate. The original IRS voluntary disclosure program closed March 22, 2024. On August 15, 2024, the IRS announced its second iteration of the ERC voluntary disclosure program, which will run through November 22, 2024. The active ERC voluntary disclosure program will allow businesses to correct improper payments at a 15% discount and avoid future audits, penalties, and interest.
Additionally, the IRS continues to offer its ERC claim withdrawal program that has led to over 6,000 entities withdrawing approximately $677 million in ERC claims. The withdrawal program is available to businesses that have filed ERC claims but have not yet received payment, along with other prerequisite qualifiers that taxpayers must ensure are applicable to their specific facts and circumstances prior to properly being able to pursue the ERC claim withdrawal process.
Taxpayers Who Have Not Yet Filed an ERC Claim Still Have Time:
On August 1, 2024, the Senate voted against passage of the Tax Relief for American Families and Workers Act of 2024. If that bill had passed, it would have effectively prevented taxpayers from being able to claim the ERC for those who still have not yet filed their initial ERC claims. Although the bill might return to the Senate for further consideration, there is no certainty around whether the bill will ultimately pass.
To that point, and unless Congress passes a bill to sunset the ERC early, taxpayers are still able to file their ERC claims until April 15, 2025, based on employee wages paid during tax year 2021. For qualifying eligible employers, the ERC still represents an excellent opportunity for businesses who find themselves in cash poor positions and are seeking to increase liquidity.
For business owners who maintained employees on payroll during the COVID-19 global pandemic, obtaining the advice from a tax professional with the appropriate depth of experience in preparing and filing ERC claims can help you navigate the inherent complexities under the ERC framework. No matter where you are in the ERC process, a tax attorney at Howard & Howard can help you whether it be preparing your first ERC claim to be filed with the IRS, auditing an ERC claim prepared and filed by a third party to ensure validity and making the appropriate amendments with the IRS to maximize your ERC claim amount under IRS guidelines, withdrawing your claim, providing audit defense representation in front of the IRS, or addressing improperly issued IRS denial letters.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
